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Government bonds continued to behave more as portfolio-insurance policies against upheavals in Europe than as traditional debt securities. Yields rose and prices receded for U.S. Treasuries and securities of the redoubtable governments of Germany and the United Kingdom amid decreased anxiety over the ongoing euro-zone debt crisis after Greece formed a government, yields on Spain's 10-year bonds pulled back from the 7% tipping point, and European Union leaders prepared for yet another summit this week.

These factors overshadowed the Federal Reserve's widely expected decision to extend its so-called Operation Twist policy of lengthening the maturities of its Treasury portfolio in an attempt to push long-term interest rates lower. That decision not only failed to nudge Treasury yields lower, as the monetary authorities had desired, but it also didn't have the desired effect on so-called risk assets such as stocks and commodities, which plunged Thursday.

The Dow Jones Industrial Average slid 250 points and the benchmark U.S. price for crude oil fell decisively below $80 a barrel in reaction to what was seen as the Fed's tepid response to accumulating evidence of deceleration in the American economy. A worrying drop in the Philadelphia Fed's index of manufacturing in the Middle Atlantic region and further signs of a soft labor market—weekly unemployment claims stubbornly remaining in the 380,000 range and the Jolts (Job Openings and Labor Turnover Survey) data showing fewer openings were the latest evidence of the weakening trend.

While the Fed's Open Market Committee downgraded its forecasts for gross domestic product and unemployment for 2012, 2013 and 2014, the policy-setting panel took a minimalist approach by expanding Operation Twist by an additional $267 billion (on top of $400 billion so far) and to the end of the year. At that point, the Fed will have swapped effectively all of its shorter-term securities for lengthier ones.

What that will accomplish is difficult to say, given that long-term borrowing costs already are at historic lows for investment-grade corporations and mortgage borrowers (at least those with sterling credit scores). But the risk markets apparently depend on outright purchases by the Fed—a third round of quantitative easing, or QE3—for further progress. St. Louis Fed President James Bullard averred in an interview with Bloomberg Friday that the bar is set pretty high for QE3. Bullard was among the first to call for QE2 in 2010.

Nevertheless, count on QE3 being launched, writes Stephanie Pomboy in her latest MacroMavens missive. While the Occupy Wall Street crowd has demonized the rich, they're the ones who drive consumption since they're the ones with the bucks to spend. And, she observes, their willingness to spend in turn depends on the stock market, which appears to be faltering. That's even with $1.3 trillion in corporations' dividend disbursements and share repurchases.

All of which raises the likelihood of another round of QE to pump up financial assets and "reinvigorate the now-flagging high end." To do that requires raising the specter of inflation and dollar debasement to get the rich to loosen their purse strings, Pomboy caustically observes. The 99% should take the opportunity to stock up on lower-cost food and fuel while they can.

Monetary policy may eventually work against the deflationary undertow working on the U.S. economy. For now, however, it is dragging down commodity prices, which should squeeze profit margins.

Even so, government-bond yields moved up last week, albeit from the recent record lows reached in the headlong rush for safety. In the U.S. Treasury market, the benchmark 10-year note yield moved up about nine basis points, or hundredths of a percentage point, to 1.674%, some 21 basis points above the historic lows touched in early June. Until then, this was roughly the lowest 10-year yield in the history of the Republic.